As mentioned in this blog on November, 10th, Brazil’s banking system is bracing itself for a wave of consolidation. The last announcement came yesterday as Banco do Brasil, the country’s top state-controlled bank announced it will spend US$2.3 billion to buy a 71.3 percent share in Banco Nossa Caixa SA, owned by the Sao Paulo state government.

Banco do Brasil will have US$217.2 billion in assets with the acquisition of Nossa Caixa, for which it will make 18 monthly payments of US$124.7 million starting in March. Earlier this month, Brazil’s second-largest private sector bank, Itau, bought rival Unibanco, creating a Latin American financial giant with total assets surpassing Banco do Brasil.

Cyrus Sanati has posted some interesting comments on the New York Times blog about this acquisition.

“If you look at the Brazilian banking system, there are 10 large banks representing 87.1 percent of the financial system,” Felipe Asenjo Wilkins, head of research for FIT Research in Santiago, Chile, told DealBook. “This is too much if we compare it with other emerging markets like Chile, Peru and Colombia.”

So who might be next? Banco do Brasil will probably move to purchase a stake in Banco Votorantim, a family-owned bank in São Paulo, Lia da Graça, an analyst with Banif Securities in São Paulo, told Dealbook. That purchase, along with another smaller bank, would put Banco do Brasil in the top spot.

All this could be unsettling to Brazil’s third-largest bank, Bradesco. It is not shy to do a deal to maintain its market share. “From 1948, Bradesco bought like 48 financial institutions” including banks, Mr. Wilkins said.

Still about the banking situation in Brazil, news come out everyday about new joint-ventures including heavy weights on the public sector – ie. Nossa Caixa and Banco do Brasil. The Financial Times gave a note about the consolidation process running at full throttle in the country.

Brazil’s banks are preparing for a wave of consolidation following this week’s merger of Itaú and Unibanco to create the biggest bank in South America. Brazil has about 150 banks, many of them small players concentrating on a single line of business such as car loans or payroll-linked loans, areas that have grown quickly in line with rising employment and wages.

“Smaller banks have been seeing growth of 30 or 40 per cent a year,” says Ceres Lisboa, banking sector analyst in São Paulo at Moody’s, the international credit rating agency. “That’s over. They’ll have to reinvent themselves.”

Dozens of these smaller banks will be snapped up or forced to retreat into niche markets. Banco do Brasil, the federally-owned bank that was Brazil’s biggest before the latest merger, and Bradesco, formerly the biggest private-sector bank, are expected to scurry for acquisitions as they try to regain their dominance.

Consolidation will be helped by recent government measures to inject liquidity into the banking system as the global financial crisis has unfolded. The process should also be orderly as Brazil’s banking system remains solid, thanks to relatively low levels of lending and the fact little credit is sourced overseas.

Here’s a quick news round up, about the largest merger in the Brazilian banking history. Itau and Unibanco have announced a joint-venture yesterday creating the largest bank in Latin America – arguably the first major banking player in Latin America – combining about $260 billion in assets. The new Itau-Unibanco has also already announced investments in Mexico, Colombia and Peru. The press in Brazil has welcomed the merger, seen as a good timing to make the country’s financial system more solid to face tough times.

From The Wall Street Journal: “Brazil’s central bank recently announced a $50 billion program of currency swaps to keep financial institutions operating amid the credit squeeze. “This concentration will help strengthen the local financial system,” Finance Minister Guido Mantega told reporters in Brasilia.”

Washington Post: The banks did not give a value for their all-stock transaction, but Sao Paulo-based consultancy Economatica estimated the combined banks would have a market value of $41.3 billion, eclipsing Brazil’s state-owned Banco Brasil and the publicly traded Banco Bradesco.

Financial Times: “This operation takes place at a time of great changes and opportunities in the world, particularly in the financial sector,” they said, adding that Brazil’s banking industry was “in a privileged position, with enormous potential to improve its situation even more in relation to the rest of the world”.

The New York Times: “Whoever says the entire world needs to deleverage hasn’t paid attention to what’s happening in Brazil. Banco Itaú’s $15 billion takeover of a rival, Unibanco, should change that. The deal, announced Monday, creates Latin America’s biggest financial institution, which may become one of the few bright spots in the global banking firmament.”

AFP: “Together, Itau and Unibanco will have assets of 575 billion reais (265 billion dollars) and account for around 20 percent of Brazil’s savings accounts and credit. According to Fortune magazine, Itau made two billion dollars in profits last year from 29 billion dollars in revenues and 168.6 billion dollars in assets. Itau Unibanco would have a “strong international presence,” notably in the countries in the Mercosur trade bloc that comprises Argentina, Brazil, Paraguay and Uruguay, it said.